IMF warns on emerging market currency controls
By Christian Oliver in Daejeon
Published: July 11 2010 15:44
Tighter capital controls in Asia and Latin America should only be used to combat short-term surges in investment and must not become permanent, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned yesterday.
Mr Strauss-Kahn said he was sympathetic towards emerging countries that imposed such controls temporarily as a last resort against a flood of investors pumping up inflation and asset bubbles.
EDITOR’S CHOICE
Emerging Asia toys with capital controls - Jul-01
US welcomes loosening of renminbi peg - Jul-09
“You have to be very pragmatic. Long-term capital controls are certainly not a good thing,” he told the Financial Times. “But short-term capital controls may be necessary in some cases: it is a matter of balancing the costs of different options.”
Brazil last year imposed a 2 per cent tax on foreign portfolio investments while Indonesia and South Korea both imposed capital controls last month to control volatility.
He said the world had now entered the “last part” of the global financial crisis, kindling an increased risk appetite for emerging markets, while Europe, Japan and the US remained relatively unalluring. “It is just fair that those (developing) countries should try to manage the inflows,” he said.
Mr Strauss-Kahn said China’s renminbi remained “substantially” undervalued but told the international community not to see revaluation, which will be very gradual, as a panacea.
“Sometimes people are surprised it does not go up 20 per cent in a week. That will not happen,” he said. “It would be wrong of most countries to believe that they can focus on this as if it is the only reason why we have imbalances. It should not be a kind of front that allows countries to avoid taking action.”
When asked what measures other countries should prioritise to counter imbalances, Mr Strauss-Kahn stressed deficit reduction.
He said Greece was on track to meet the targets set under its bail-out and applauded last week’s decision to raise the pension age. More broadly, he said feeble growth remained the “main risk” for Europe and stressed that Greek-style fiscal consolidation should not become a continent-wide obsession.
“It is a very difficult balance in Europe these days,” he said. “Some countries have to really fix their fiscal situation immediately, even if it damages their growth prospects. Fortunately for Europe, the biggest economies – France, Germany and some others – can adjust in the medium term and do not need an adjustment that is too tough in 2010 or even 2011.”
Mr Strauss-Kahn said the IMF would work with the Group of 20 leading economies to forge a “multilayered” framework of global financial safety nets by November. The idea comes from South Korea, this year’s G20 president, and is intended to reduce the need for an accumulation of reserves in countries, such as South Korea itself, that fear cyclical crises.
“One of the big ideas is that it should be ready in advance and be more proactive than most of the fund activities have been in the past, more like the flexible credits lines that have been used by Mexico, Poland and Colombia.”
He declined to specify the scale of guarantees required.
By Christian Oliver in Daejeon
Published: July 11 2010 15:44
Tighter capital controls in Asia and Latin America should only be used to combat short-term surges in investment and must not become permanent, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned yesterday.
Mr Strauss-Kahn said he was sympathetic towards emerging countries that imposed such controls temporarily as a last resort against a flood of investors pumping up inflation and asset bubbles.
EDITOR’S CHOICE
Emerging Asia toys with capital controls - Jul-01
US welcomes loosening of renminbi peg - Jul-09
“You have to be very pragmatic. Long-term capital controls are certainly not a good thing,” he told the Financial Times. “But short-term capital controls may be necessary in some cases: it is a matter of balancing the costs of different options.”
Brazil last year imposed a 2 per cent tax on foreign portfolio investments while Indonesia and South Korea both imposed capital controls last month to control volatility.
He said the world had now entered the “last part” of the global financial crisis, kindling an increased risk appetite for emerging markets, while Europe, Japan and the US remained relatively unalluring. “It is just fair that those (developing) countries should try to manage the inflows,” he said.
Mr Strauss-Kahn said China’s renminbi remained “substantially” undervalued but told the international community not to see revaluation, which will be very gradual, as a panacea.
“Sometimes people are surprised it does not go up 20 per cent in a week. That will not happen,” he said. “It would be wrong of most countries to believe that they can focus on this as if it is the only reason why we have imbalances. It should not be a kind of front that allows countries to avoid taking action.”
When asked what measures other countries should prioritise to counter imbalances, Mr Strauss-Kahn stressed deficit reduction.
He said Greece was on track to meet the targets set under its bail-out and applauded last week’s decision to raise the pension age. More broadly, he said feeble growth remained the “main risk” for Europe and stressed that Greek-style fiscal consolidation should not become a continent-wide obsession.
“It is a very difficult balance in Europe these days,” he said. “Some countries have to really fix their fiscal situation immediately, even if it damages their growth prospects. Fortunately for Europe, the biggest economies – France, Germany and some others – can adjust in the medium term and do not need an adjustment that is too tough in 2010 or even 2011.”
Mr Strauss-Kahn said the IMF would work with the Group of 20 leading economies to forge a “multilayered” framework of global financial safety nets by November. The idea comes from South Korea, this year’s G20 president, and is intended to reduce the need for an accumulation of reserves in countries, such as South Korea itself, that fear cyclical crises.
“One of the big ideas is that it should be ready in advance and be more proactive than most of the fund activities have been in the past, more like the flexible credits lines that have been used by Mexico, Poland and Colombia.”
He declined to specify the scale of guarantees required.
